American politics

The Great Gatsby curve

Don't worry, old sport

GREG MANKIW has followed up on his extremely unconvincing paper dismissing concern over high income inequality with an even less convincing blog post dismissing concern over low income mobility. Mr Mankiw argues that the so-called Great Gatsby curve, which shows that countries with higher income inequality also have lower income mobility, is "not particularly surprising". He offers an analogy: think of nations as chess clubs.

Some clubs have a bunch of players with similar levels of skill at chess. In this case, everyone would have a win-lose record that is close to each other, and a person's club ranking one year would not have a lot of predictive value for his ranking the next. That is, we would have small inequality and substantial mobility.

Other clubs are more heterogeneous. They have some masters and some novices. The masters have much better records than the novices, and their better records tend to persist year to year. That is, we would have substantial inequality and little mobility.

If we put all these clubs together in a scatterplot, we would get something close to the Great Gatsby curve.

What Mr Mankiw is implying here is that the reason why countries like Germany or Australia have low levels of income inequality, while countries like America and China have high levels of income inequality, is that people in Germany and Australia are more homogenous in their economic abilities than people in America and China. Because they are more homogenous, they are also more likely to show variance in their relative rankings from year to year.

We will leave aside for the moment the question of why one might think that Germans are more homogenous than Americans, which might reflect a familiar kind of prejudice, or why one might think that Chinese are less homogenous than Australians, which would reflect a novel one. The main point here is that Mr Mankiw evidently has no idea why people talk about the Great Gatsby curve. The significance of the curve is that people who want to defend gross inequalities of income in countries like America often argue that income inequality is okay as long as you have income mobility: if today's burger-flipper can become tomorrow's prosperous burgher with a little grit and hard work, society is still fair. The problem with this thesis is the Great Gatsby curve. It shows that the greater the distance in a country between rich and poor, the harder it is to go from poor to rich or vice versa. Countries don't compensate for income inequality through income mobility; they tend to be either fair or unfair on both metrics at the same time. If Mr Mankiw does not find this "surprising", he should wonder why people who defend gross inequalities of income would have resorted to such an implausible argument.

Mr Mankiw then adds a corollary which I can only describe as amazing.

Suppose we combined two clubs, one with mostly masters and one with mostly novices. The new combined club would be more heterogeneous and, therefore, would exhibit more inequality and less mobility than either of the clubs separately.

The application of this corollary to the Great Gatsby curve is that if we looked at Europe as a whole, rather than each nation separately, we would find that Europe as a whole has more inequality and less mobility than the individual countries. That is, Germans are richer on average than Greeks, and that difference in income tends to persist from generation to generation. When people look at the Great Gatsby curve, they omit this fact, because the nation is the unit of analysis. But it is not obvious that the political divisions that divide people are the right ones for economic analysis. We combine the persistently rich Connecticut with the persistently poor Mississippi, so why not combine Germany with Greece?

The amazing thing here is that Mr Mankiw seems to have no concept of what argument he's in. Let's put it this way: does Mr Mankiw think that the reason why Germans are persistently richer than Greeks is that Germans are innately smarter or harder-working than Greeks? Seriously? Is "Greeks deserve to be poorer because they have less merit" really the argument he wants to make here? I could almost believe it might be, except that he then goes on to compare the German/Greek divide to the Connecticut/Mississippi divide. Does Mr Mankiw believe that Mississippians are poor because they are innately less smart or hard-working than people in Connecticut? Take a look at the fascinating new study of regional income mobility differences which David Leonhardt reports on today in the New York Times. It's true: Mississippi has much less income mobility than Connecticut. So do Alabama, Georgia, the Carolinas, Ohio and Indiana. Does Mr Mankiw think people in Indiana are innately less smart or hard-working than people in Connecticut? If not, what differences between Indiana and Connecticut account for the disparity?

In his article on income disparity, Mr Mankiw hinted that genetic differences may play a significant role in earning power. I don't think Mr Mankiw believes that Greeks and Mississippians are genetically inferior to Germans and Connecticut...ians. I imagine he would make the reasonable argument that people in Greece and Mississippi have lower earning power because they are less educated, live in lower-productivity economies, and have inferior governance to people in Germany and Connecticut. But this is the whole point of the Great Gatsby curve! In a country like China, if you are born in a farming village in Xinjiang, you are overwhelmingly likely to be poor and remain poor; if you are born in a middle-class family in Shanghai, you may attend one of the world's finest technical universities and become a millionaire. To the extent that wealth in America depends on whether you are born in a poor state like Mississippi or a rich one like Connecticut, we are less like Australia's egalitarian, mobile economy, and more like China's inegalitarian, stratified one.

With his chess-club analogy, Mr Mankiw is trying to make it seem as though the responsibility for income disparities and income immobility in different groups must lie in the abilities of the players. The rules of chess are the same everywhere, so if some groups have wide and persistent disparities between players, it must be because the players' abilities vary widely. Societies, obviously, do not all play by the same rules. The assumption of most people who believe in the logic of statistics would be that if your chess clubs are sufficiently large, say 10m or more, the distribution of the players' innate abilities is probably pretty similar. In that case, if there are differences in the level and persistence of variance, it's probably because the clubs are playing with different rules. The question is whether those rules are fair, or whether they codify unjustifiable privilege.

The argument over the Great Gatsby curve is an argument about whether America's economy is fair. With his Germany/Greece and Mississippi/Connecticut analogy, Mr Mankiw has stumbled on a very convincing point: whether you are rich or poor in Europe or America depends to a great extent not on your own qualities or efforts, but on where you happen to be born. America is not a meritocracy, Mr Mankiw is saying; not only do those born rich tend to stay rich and vice versa, just being born in one state or another makes a huge difference to your lifelong earnings. Amazingly, he seems completely unaware that this is the case he's just made.

The big problem with the chess analogy is that in order to hold true for economics the way it seems to be used here (instead of reading Mankiw, I work for a living) some things would have to be true about how money works that simply are not.

The main one is that in chess, each player starts the game with a symmetrical state: 1 king, 1 queen, 2 bishops, 2 knights, 2 rooks, 8 pawns all with equal starting position. This means that in any game of chess, one would generally expect to see the more skilled player win. Economic transactions don't work that way: if I start the game with $1, and you start the game with $1bn, you pretty much don't have to play, and I need to be exceptional to even compete.

The analogy actually works better if it shows a chess club with a special set of rules: for each game a player wins, they start future games with an additional piece, and for each game a player loses they are forced to start future games with one fewer. Between players of roughly equal skill, the extra pieces probably more or less balance out over time such that everyone remains more or less equal. In the masters/novices club, however, you will quickly see the masters reach a point where they have more pieces than can fit on the board to start each game and the novices are essentially starting the game in checkmate. At this point, the masters are no longer even playing against the novices, they just periodically show up, automatically win a game, and stockpile another backup pawn. They aren't winning by virtue of better play in the present, but by better play in the past which conveys a virtually insurmountable advantage at the outset.

In short: it's really easy not to lose when you win just by showing up.

The argument you're making is not the one Mankiw is making. To the extent that income inequality between Mississippi and Connecticut is the result of sorting, with all the potentially rich people from Mississippi moving to Connecticut, then the difference between Mississippi and Connecticut is nothing like the difference between Greece and Germany. There is some labour mobility of that sort from Greece to Germany, but it accounts for only a tiny portion of the difference in incomes.

In fact, however, labour mobility in the US has been shrinking as income inequality has risen. Which at least casts doubt on the extent to which this is really the cause here, as opposed to persistent self-reinforcing privileges from being born in a rich region rather than a poor one.

In fact the new Harvard-Berkeley study finds that income mobility in specific regions depends on a lot of factors, including: how good the education system is (Mississippi/Connecticut: check), how segregated cities are by class and race (Mississippi/Connecticut: check)...

I get tired of defending Mankiw but never of arguing with Brer M.S., so a couple of things: First, I bet Connecticut is full of prosperous natives of Mississippi. So the argument that Mankiw is suggesting a native difference seems weak. People move to Connecticut most often because they got rich in New York City, wherever they were born.

Also, the difference between Greeks and Germans needn't be genetic. This is where I think Mankiw is on stronger weak footing. The policies in Greece seem (from the distance of a not-too-well-informed American) to be almost compulsively egalitarian. Germany is much more egalitarian than the U.S. but probably much less so than Greece.

I think Mankiw could be right in the sense that there is an upper threshold of political concern for equality and social mobility after which you do real cultural harm to the ability of people to improve their productivity. That's why comparing average income in Greece, Germany and the U.S. has some validity.

A Hungarian friend once told me this joke: A poor American farmer finds his cow sick and prayers for her to get well. An Italian farmer finds his only cow sick and prayers for her to die so the state will give him a young cow. A Hungarian farmer finds his only cow sick and prays that God will kill his neighbor's cow.

Mankiw is the Paul Krugman of the right, but he is correct if he is arguing that single-minded attention to lower inequality can be counter-productive. We probably don't want social mobility to improve because the quintiles are only separated by what you can win in a good day at the track. Or he might be correct about that. I enjoy arguing with M.S. but not enough right now to read Mankiw.

The big problem with the chess analogy is that in order to hold true for economics the way it seems to be used here (instead of reading Mankiw, I work for a living) some things would have to be true about how money works that simply are not.

The main one is that in chess, each player starts the game with a symmetrical state: 1 king, 1 queen, 2 bishops, 2 knights, 2 rooks, 8 pawns all with equal starting position. This means that in any game of chess, one would generally expect to see the more skilled player win. Economic transactions don't work that way: if I start the game with $1, and you start the game with $1bn, you pretty much don't have to play, and I need to be exceptional to even compete.

The analogy actually works better if it shows a chess club with a special set of rules: for each game a player wins, they start future games with an additional piece, and for each game a player loses they are forced to start future games with one fewer. Between players of roughly equal skill, the extra pieces probably more or less balance out over time such that everyone remains more or less equal. In the masters/novices club, however, you will quickly see the masters reach a point where they have more pieces than can fit on the board to start each game and the novices are essentially starting the game in checkmate. At this point, the masters are no longer even playing against the novices, they just periodically show up, automatically win a game, and stockpile another backup pawn. They aren't winning by virtue of better play in the present, but by better play in the past which conveys a virtually insurmountable advantage at the outset.

In short: it's really easy not to lose when you win just by showing up.

The argument you're making is not the one Mankiw is making. To the extent that income inequality between Mississippi and Connecticut is the result of sorting, with all the potentially rich people from Mississippi moving to Connecticut, then the difference between Mississippi and Connecticut is nothing like the difference between Greece and Germany. There is some labour mobility of that sort from Greece to Germany, but it accounts for only a tiny portion of the difference in incomes.

In fact, however, labour mobility in the US has been shrinking as income inequality has risen. Which at least casts doubt on the extent to which this is really the cause here, as opposed to persistent self-reinforcing privileges from being born in a rich region rather than a poor one.

In fact the new Harvard-Berkeley study finds that income mobility in specific regions depends on a lot of factors, including: how good the education system is (Mississippi/Connecticut: check), how segregated cities are by class and race (Mississippi/Connecticut: check)...

You miss the point entirely - people want to have the ability, through hard work, to improve their lot in life. Start out poor in the projects but work/study hard, go to college and earn an engineering (or other professional) degree, get a good job, and live in a nice home in a nice safe neighborhood and raise a family. This isn't possible for a lot of people in America, regardless of their work ethic, and that's a problem for a nation that bills itself as the place where you can make it if you work hard.

I get tired of defending Mankiw but never of arguing with Brer M.S., so a couple of things: First, I bet Connecticut is full of prosperous natives of Mississippi. So the argument that Mankiw is suggesting a native difference seems weak. People move to Connecticut most often because they got rich in New York City, wherever they were born.

Also, the difference between Greeks and Germans needn't be genetic. This is where I think Mankiw is on stronger weak footing. The policies in Greece seem (from the distance of a not-too-well-informed American) to be almost compulsively egalitarian. Germany is much more egalitarian than the U.S. but probably much less so than Greece.

I think Mankiw could be right in the sense that there is an upper threshold of political concern for equality and social mobility after which you do real cultural harm to the ability of people to improve their productivity. That's why comparing average income in Greece, Germany and the U.S. has some validity.

A Hungarian friend once told me this joke: A poor American farmer finds his cow sick and prayers for her to get well. An Italian farmer finds his only cow sick and prayers for her to die so the state will give him a young cow. A Hungarian farmer finds his only cow sick and prays that God will kill his neighbor's cow.

Mankiw is the Paul Krugman of the right, but he is correct if he is arguing that single-minded attention to lower inequality can be counter-productive. We probably don't want social mobility to improve because the quintiles are only separated by what you can win in a good day at the track. Or he might be correct about that. I enjoy arguing with M.S. but not enough right now to read Mankiw.

And who makes the laws? Rich people (mostly lawyers). Who are the law makers in debt to for their election to office? The rich people who gave them money for campaigning. Who then gets to tell the legislators what to vote for and how to vote? That's right, rich people (and big corporations, run by rich people who want to stay rich). It's self reinforcing, and has absolutely nothing to do with merit. Success isn't being demonized, keeping others down through structural impediments is.

Blaming gov't is like blaming a hammer for hitting you in the thumb - it's just a tool, how you use it is the problem.

I am shocked and somewhat dismayed by the amount of support openly socialist policies appear to be receiving from the most unexpected quarters.

As usual, the arguments for redistribution largely confuse causes with effects. The proposed solutions are akin to uprooting corn from a field and planting it in sand, because it is unfair to the sand to be barren. But that is not for lack of corn. In fact, it is the other way around.

Worryingly, the argument also presupposes there is but one cause of inequality.

Nonsense. German inequality is a result of entrepreneurial innovation and industrial competition, whereas Greek inequality is largely the result of corruption and rent seeking.

Whether a person becomes rich by starting a company, employing people, introducing a superior product or service and benefitting society, or whether it is a result of cronyist ties and backhanders makes all the difference not just in the world, but in the entire god damn galaxy.

Needless to say, redistributive policies and attempts to police the playground make the latter infinitely easier. Observe the "equality" Soviet Union enjoyed. This is a staple of egalitarian forms of organisation. All are equal, but some are more equal.

State-created inequality, which is just another form of violence-based inequality, is the problem. Not inequality per se. There is also the option to let the state uphold a legal framework and not interfere in the game, an option that seems both singularly sensible and increasingly rare.

American inequality is attributable to regional differences in culture, mindset and yes, demographics. One need not be a racist to recognize difference.

American inequality is largely fair. Yes, there are worrying ties to the government, especially in the green tech (oxymoron?) and military industrial complexes, but by and large, the average rich American got that way in a honest and productive way. This is a singular merit of a free market system.

A more equal society is surely an aesthetically and morally pleasing goal, which is incidentally an entirely different question from justice. Everybody wants to live in a world where people are prosperous and a chimneysweep can be a billionaire if he plays his cards right and has a good idea.

It seems to me that Mankiw is not making one case or another, but rather criticizing the manner in which the Great Gatsby curve is measured. He is saying it is unsurprising we see what we do because of the mere fact that inequality is persistent (for the reasons the article describes). In other words, the curve is uninformative. In addition, he is saying that the curve is dependent on arbitrary political boundaries, and questions whether this dependence is desirable in its construction. A curve that merely outlines a near-tautological relationship (namely, that inequality is persistent) doesn't seem to be all that useful (is Mankiw's argument).

The results won't fit into anyone's existing ideologies. Liberals will be happy to learn that high mobility is correlated with higher taxes, a larger middle class, better K-12 education, and less racial and economic segregation. Conservatives will be happy to hear that it's also correlated with religious involvement and two-parent households but is NOT correlated with the wealth of the 1%, welfare policy, or accessibility to higher education. Racists will be happy to learn that high mobility is correlated with less black people.

The South has the worst mobility and the fly-over states from Wisconsin to Utah have the highest.

This is one of a series of articles in TE over the last year about the influence of origins on social advancement. The academic evidence is mounting that life chances are just as important as hard work and ability.
This belief is one of the kids that was exposed as not wearing shorts when the GFC sent the tide out (along with its rather precocious siblings quant analysis and rational purchasing assumptions).
Unfortunately this does rather contradict shibboleth number one of the American dream. Which I suspect is why some increasingly desperate arguments are being ranged against it.
The new Brit royal baby is going to have much better opportunities than all the other kids born in the UK today, regardless of ability. And in the US, another scion of the Bush political dynasty started his career yesterday, with a massive boost from his surname.
All other things being equal, talent and hard work will allow someone to get on; but if the playing field is uneven different outcomes are almost guaranteed.

"That there's less mobility if the distance you have to move to count as having moved is greater is a truism."

No, it's not a truism. It could easily have turned out to be the case that the American economy is an amazingly fluid one where people are constantly making and losing fortunes, while the German economy is stolid and static. In that case the American economy would have more inequality but greater mobility, as is assumed in the "Horatio Alger" vision that (at least until recently, probably still) dominates conservative discourse on this subject. It's only in the last 5 years or so that people have become generally aware of the data showing that this is not the case.

Another problem facing the intelligent but unconnected outsider is the uneducated prejudices of snickering metropolitan elites, not everybody from Mississippi was born with six fingers and old granddaddy JR's buck teeth.

Because if you aren't with us, you're against us. Mankiw's post was completely apolitical and he explicitly says there are no policy implications to be drawn. But he didn't jump on board the Great Gatsby Curve argument for less income inequality so he's racist.